What is Debt Service Coverage Ratio (DSCR)?
Debt Service Coverage Ratio (DSCR) is the ratio of a property's annual net operating income to its annual debt service. A DSCR of 1.20 means the property generates 20% more income than it needs to cover the loan payment. Most DSCR lenders require 1.10-1.25 to underwrite.
DSCR is the underwriting metric for non-owner-occupied investment loans. Unlike a conventional mortgage that underwrites the borrower's personal income, a DSCR loan underwrites the property's cash flow. The investor's W-2 income, debt-to-income ratio, and personal tax returns don't matter — the property has to carry itself.
NOI for DSCR purposes is gross rent minus operating expenses (taxes, insurance, HOA, property management, vacancy reserve, repairs reserve). Critically, NOI does NOT subtract the mortgage payment — that's the denominator of the ratio. Some lenders use a stripped-down version (gross rent minus just taxes and insurance) called "rent-divided-by-PITI" which produces a higher DSCR; verify which version your lender uses before underwriting.
DSCR loans typically run 100-200 basis points above conventional rates, with 20-25% down required. They're the workhorse loan product for BRRRR refis and small-multifamily acquisitions.
Gross rent $24,000/yr. Expenses (taxes, insurance, PM, reserves) $6,000/yr. NOI = $18,000. Loan payment (PITI excluding TI, since TI is in expenses) = $14,000/yr. DSCR = $18,000 / $14,000 = 1.29. Clears 1.20 threshold.
Concepts that connect.
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat — a real-estate investing strategy where an investor buys a distressed property cheap, renovates it, rents it out, refinances at the improved appraisal to recover most or all of the original capital, then repeats the process with the recovered capital.
Net Operating Income (NOI) is a rental property's annual gross rental income minus all operating expenses, before debt service and income taxes. NOI is the denominator of cap rate and the numerator of DSCR — it's the most-used number in rental underwriting.
Capitalization Rate (cap rate) is a property's annual NOI divided by its purchase price (or current market value), expressed as a percentage. It's an unlevered yield metric — the return an all-cash buyer would earn before financing.
Cash-on-cash return is annual pre-tax cash flow divided by the total cash the investor put into the deal (down payment + closing + rehab + reserves). Unlike cap rate, it accounts for financing. The most useful metric for comparing leveraged investments.
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